Way forward for Indian Railways in the financial crisis

Authored by C P Sharma, Managing Director Daulatram Engineering Services Pvt Ltd. He is Past Chairman CII Railway Equipment Division.

Finance is the lifeline of every business, be it a government or a private company.  COVID-19 has had a devastating impact on human lives, economies, and stock markets. In the current state of flux, the Indian railways need to carefully review the way capital is consumed in the organization.

Traditional methods for selection of projects have proven to be grossly inadequate to meet the Railways’ aspirations. The Railway should consider the total life cycle cost of a project along with additional criteria of ongoing maintenance costs, upgrades, and repairs that are part of the Operating Expenses.

Indian Railways embarked upon the Journey to 100% electrify the entire 1,20,000 Kilometers network and to become a net-zero emission network by 2024.

All of these changes and upgrades are good to have and an organization having surplus funds to spend and not as the investment may choose to go ahead. So is not the case for Indian Railways, it can afford it. Indian Railways should carry out financial assessment and impact on business at least for direct outcomes of the decisions. It would be helpful to categorize the Indian Railway track in three groups: 1) Economic lines 2) Non-economic but operationally preferred and 3) Non remunerative lines and then assess the following situations which emerge due to the decisions.

1) How will Indian Railways pay back the funds it will raise for electrification of lines that are less remunerating and economically not viable?

2) How will Indian Railways manage the increased cost of maintenance for the electrified lines falling in the low remunerative and economically unviable sections?

3) How will Indian Railway ensure that disposal of its serving diesel locomotive is at a value which is commensurate to the earning capacity of the locomotive being disposed of?

4) Would the existing OHE permit continuous use of increased load i.e. peak current when traction is completely switched to electric and there would be a requirement of expenditure for upgrading the existing OHE?

This analysis will help to safeguard the risk of ruining the cash flow and put the organization into a spiral of a financial crisis. A detailed fail-proof executable plan should have been ready before commencing execution of the decision would be the smart way to do.

Indian Railways has a well-maintained fleet of 10000 locomotives, with about 4000 diesel and 6000 electric and these are presently serving the country’s requirements. The plan to replaceall diesel locomotives with the electric locomotive to save diesel fuel cost is appreciated but the complete financial impact has not been reviewed and neither what-if analysis carried to situations such as diesel fuel crashing to a $1 per barrel. Decisions such as this have a far-reaching implication, the Indian Railways cannot run the risk of erring without verifying the hypothesis and validating the model before it is too late to reverse the decision and railways become a financial burden to the government exchequer.  Needless to say, the multi traction renders greater operational flexibility and this has been proven over the years by Indian Railways itself. Eliminating the most versatile diesel locomotive which can work on any track with or without OHE will drastically reduce the flexibility of operations.

It is to be noted that train length is a limitation on Indian Railways and shall continue as the loop length of stations can’t be changed and call for a complete upgrade.  Similarly, Axle load limitation due to track and bridges will continue to limit carrying capacity till major investments in the track are planned. Lastly, worldwide freight trains run at 100 kmph which Indian Railways is already operating. So the real bottleneck lies on track and not on traction. A prudent investment would be to upgrade tracks than to invest in electrification.

In the current situation where the whole world is hit by a pandemic and this has impacted all walks of life including a decline in business. Governments will need funds to address COVID-19 while it will have fewer finances than previous years due to a reduction of collection. Indian Railways is equally impacted, the need to smartly manage its resources with reduced expenditure. Considering Indian Railways flexibility to modify and adapt to changes quickly, it should be possible for the organization to demonstrate its ability to reduce expenses and match with lower earnings without burdening the Government funds for extra budget.

Indian Railways will require a complete review of all its expense heads concerning the essential requirement and avoidable expenses. A few facts related to the choice of traction will help to appreciate and make informed decisions:

Cost of acquisition of new assets:

Cost of Diesel loco 16.99 Cr

Cost of Electric Loco  28.00  Cr

Cost of maintenance per locomotive per year.

Maintenance Cost of Diesel Loco per year 55.22 Lacs

Maintenance Cost of Electric Loco per year 91.0 Lacs

Cost of Operation of Diesel Locomotives and electric locomotives can be calculated based on capital investment

A few suggestions it needs to act immediately would be to defer all investment projects which don’t have closure within six months. This includes electrification of track work which has been approved under a strategic decision.

Replacing old locomotives with new locomotives be stopped as existing fleet size with an additional 180 locomotives annually is adequate to manage the freight requirements.

Indian Railways has a contract with ALSTOM and GE  for manufacture and supply of 180 locomotives per year, this should cover the major requirement for replacement of old and unviable diesel and electric locomotives. The building of additional locomotives should be only if replacement of furthermore old unviable locomotives is unavoidable.

Another point to consider that cost of diesel locomotive is much lower that electric locomotive, it makes financial prudence that choice of traction should be diesel over electric when a single-headed train is the operating plan in India and advantage of traction is lost due to limitation of train length, axle load and mixed train operation (passenger and freight).

Another point to consider is that diesel fuel cost has reduced across the world, Indian Railway should take the advantage of fuel cost reduction and prioritize train operations on HHP diesel locomotives to hold back CAPEX investments and enable Government to divert the funds to combat COVID 19 which is more pressing requirements facing the country.